NATH

Business Context and Reporting Period

Company: Nathan's Famous, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: March 30, 2003 (52 weeks)
Business Overview: The Company operates and franchises fast food units under the Nathan's Famous, Miami Subs, and Kenny Rogers Roasters brands. It also operates a Branded Product Program selling proprietary items to foodservice retailers. As of March 30, 2003, the system included 343 franchised units, 12 company-owned units, and approximately 2,200 branded product points of sale across 41 states and 12 foreign countries.

Key Financial Metrics

Revenue Composition: Sales were $24.9 million (down 9.4%), Franchise fees and royalties were $6.0 million (down 24.8%), and License royalties were $2.6 million (up 27%).

Material Changes vs. Prior Period

• Significant Net Loss: The Company reported a net loss of $13.97 million compared to a net income of $1.25 million in the prior year. This was primarily driven by a one-time cumulative effect of a change in accounting principle (SFAS No. 142) resulting in a $12.34 million charge for the impairment of goodwill and intangible assets.
• Revenue Decline: Total revenues decreased by 14.2% to $33.9 million. Company-owned restaurant sales dropped 18.6% due to the closure of five units and lower comparable store sales. Franchise royalties declined 20.8% due to lower franchise sales and increased unrealizable royalties.
• Impairment Charges: Excluding the accounting change, the Company recorded $1.37 million in impairment charges for long-lived assets (seven underperforming stores) and $1.43 million for impaired notes receivable.
• Discontinued Operations: Eight company-owned restaurants were classified as discontinued operations, including seven Home Depot locations terminated in early 2003.

Guidance, Outlook, and Risks

• Strategic Focus: Management plans to expand the Branded Product Program, develop international master franchising, and pursue co-branding opportunities (e.g., "Miami Subs Plus"). The Company intends to selectively open new company-owned units in New York and Florida.
• Liquidity: Management believes available cash, marketable securities, and internally generated funds are sufficient to finance operations for the next twelve months. The Company maintains a $7.5 million uncommitted line of credit with no borrowings outstanding.
• Stock Repurchases: The Company has repurchased approximately 1.7 million shares of common stock at a cost of $6.2 million and expects to continue repurchases based on market conditions.
• Risks and Contingencies:
  • Legal: A $17 million lawsuit regarding employee misconduct was settled for $659,000. Other litigation includes a dismissed breach of contract claim and a slip-and-fall case where the franchisee's insurer is defending the Company.
  • Lease Obligations: The Company remains contingently liable for lease costs on 33 properties subleased to franchisees and has guaranteed franchisee loans totaling approximately $1 million.
  • Commodity Costs: While commodity prices were stable in 2003, a 10% increase in food and paper product costs would increase cost of sales by approximately $1.1 million.

Investor Verification Checklist

• Accounting Change Impact: Verify the sustainability of earnings by excluding the $12.3 million non-cash goodwill impairment charge related to SFAS No. 142 adoption.
• Franchisee Collectibility: Review the increase in unrealizable franchise royalties (59 locations in 2003 vs. 48 in 2002) and the $1.4 million charge for impaired notes receivable.
• Discontinued Operations: Assess the financial impact of the eight abandoned restaurants, particularly the seven Home Depot locations, on future cash flows.
• Stock Repurchase Program: Confirm the remaining authorization and cash impact of the ongoing stock buyback program.
• Lease Liabilities: Evaluate the risk associated with the $13 million in net operating lease commitments and contingent liabilities for subleased properties.